Business or personal

When a client meets with me to discuss starting a new business, one piece of advice I offer is to keep personal transactions out of the business.  In the case of a proprietorship or a limited liability company, I advise to owner to tax a periodic draw, transfer that amount to the personal checking account, and make the personal purchases from the personal check book.  It doesn’t have to be this way, and good accounting can still properly account for personal purchases made from the business account.  We all do this from time-to-time, but I strongly advise against it.

A client recently made major renovations to her residence, paying for most of the items with the business checking account, because that was where the available funds were.  Those payments were property recorded as an owner’s draw.  The client had impeccable business records, but did not keep the support for the personal items, because, after all, she did not try to deduct those items for income tax purposes.

The business was audited by the Washington Department of Revenue. The auditor examined all items paid through the business account, including the personal home renovation expenditures. Because the client could not produce the documentation showing that sales tax was paid for the personal items, a substantial Use Tax deficiency was assessed.

There are two important lesions to be learned.  First, do not make personal expenditure from the business account, even if it can be accounted for properly. Where this first lesion is not followed, keep a copy of the documentation for personal expenditure from the business account with the business records.

This was an expensive lesson for my client.

Info@hkpseattle.com